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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
______________________________
FORM 10-Q 
______________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  ________ to ________                     
Commission File Number: 1-13245
______________________________ 
PIONEER NATURAL RESOURCES COMPANY
(Exact name of Registrant as specified in its charter)
______________________________
Delaware
 
75-2702753
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
5205 N. O'Connor Blvd., Suite 200, Irving, Texas
 
75039
(Address of principal executive offices)
 
(Zip Code)
(972) 444-9001
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report) 
______________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes   ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   ¨    No  ý
Number of shares of Common Stock outstanding as of October 28, 2016                               169,720,677


Table of Contents

PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS 
 
 
Page
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015
 
 
 
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statement of Equity for the nine months ended September 30, 2016
 
 
 
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 6.
 
 
 
 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY
Cautionary Statement Concerning Forward-Looking Statements
The information in this Quarterly Report on Form 10-Q (this "Report") contains forward-looking statements that involve risks and uncertainties. When used in this document, the words "believes," "plans," "expects," "anticipates," "forecasts," "intends," "continue," "may," "will," "could," "should," "future," "potential," "estimate" or the negative of such terms and similar expressions as they relate to Pioneer Natural Resources Company ("Pioneer" or the "Company") are intended to identify forward-looking statements, which are generally not historical in nature. The forward-looking statements are based on the Company's current expectations, assumptions, estimates and projections about the Company and the industry in which the Company operates. Although the Company believes that the expectations and assumptions reflected in the forward-looking statements are reasonable as and when made, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond the Company's control.
These risks and uncertainties include, among other things, volatility of commodity prices, product supply and demand, competition, the ability to obtain environmental and other permits and the timing thereof, other government regulation or action, the ability to obtain approvals from third parties and negotiate agreements with third parties on mutually acceptable terms, litigation, the costs and results of drilling and operations, availability of equipment, services, resources and personnel required to perform the Company's drilling and operating activities, access to and availability of transportation, processing, fractionation and refining facilities, Pioneer's ability to replace reserves, implement its business plans or complete its development activities as scheduled, access to and cost of capital, the financial strength of counterparties to Pioneer's credit facility, investment instruments, derivative contracts and the purchasers of Pioneer's oil, NGL and gas production, uncertainties about estimates of reserves, identification of drilling locations and the ability to add proved reserves in the future, the assumptions underlying production forecasts, quality of technical data, environmental and weather risks, including the possible impacts of climate change, the risks associated with the ownership and operation of the Company's industrial sand mining and oilfield services businesses, and acts of war or terrorism. These and other risks are described in the Company's Annual Report on Form 10-K, this and other Quarterly Reports on Form 10-Q and other filings with the United States Securities and Exchange Commission. In addition, the Company may be subject to currently unforeseen risks that may have a materially adverse effect on it. Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward-looking statements. See "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," "Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk" and "Part II, Item 1A. Risk Factors" in this Report and "Part I, Item 1. Business — Competition, Markets and Regulations," "Part I, Item 1A. Risk Factors," "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 for a description of various factors that could materially affect the ability of Pioneer to achieve the anticipated results described in the forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no duty to publicly update these statements except as required by law.

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY
Definitions of Certain Terms and Conventions Used Herein
Within this Report, the following terms and conventions have specific meanings:
"Bbl" means a standard barrel containing 42 United States gallons.
"BOE" means a barrel of oil equivalent and is a standard convention used to express oil and gas volumes on a comparable oil equivalent basis. Gas equivalents are determined under the relative energy content method by using the ratio of six thousand cubic feet of gas to one Bbl of oil or natural gas liquid.
"BOEPD" means BOE per day.
"Btu" means British thermal unit, which is a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit.
"Conway" means the daily average natural gas liquids components as priced in Oil Price Information Service ("OPIS") in the table "U.S. and Canada LP – Gas Weekly Averages" at Conway, Kansas.
"DD&A" means depletion, depreciation and amortization.
"GAAP" means accounting principles that are generally accepted in the United States of America.
"LIBOR" means London Interbank Offered Rate, which is a market rate of interest.
"Mcf" means one thousand cubic feet and is a measure of gas volume.
"MMBtu" means one million Btus.
"Mont Belvieu" means the daily average natural gas liquids components as priced in OPIS in the table "U.S. and Canada LP – Gas Weekly Averages" at Mont Belvieu, Texas.
"NGL" means natural gas liquid.
"NYMEX" means the New York Mercantile Exchange.
"Pioneer" or the "Company" means Pioneer Natural Resources Company and its subsidiaries.
"Proved reserves" mean the quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
(i) The area of the reservoir considered as proved includes: (A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.
(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons ("LKH") as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.
(iii) Where direct observation from well penetrations has defined a highest known oil ("HKO") elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.
(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities.
(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
"U.S." means United States.
With respect to information on the working interest in wells, drilling locations and acreage, "net" wells, drilling locations and acres are determined by multiplying "gross" wells, drilling locations and acres by the Company's working interest in such wells, drilling locations or acres. Unless otherwise specified, wells, drilling locations and acreage statistics quoted herein represent gross wells, drilling locations or acres.
Unless otherwise indicated, all currency amounts are expressed in U.S. dollars.

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Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in millions)
 
 
 
September 30,
2016
 
December 31,
2015
 
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
891

 
$
1,391

Short-term investments
 
1,733

 

Accounts receivable:
 
 
 
 
Trade, net
 
447

 
384

Due from affiliates
 

 
1

Income taxes receivable
 
26

 
43

Inventories
 
159

 
155

Prepaid expenses
 
21

 
17

Notes receivable
 

 
498

Derivatives
 
172

 
694

Other
 
5

 
11

Total current assets
 
3,454

 
3,194

Property, plant and equipment, at cost:
 
 
 
 
Oil and gas properties, using the successful efforts method of accounting:
 
 
 
 
Proved properties
 
18,049

 
16,631

Unproved properties
 
486

 
169

Accumulated depletion, depreciation and amortization
 
(7,866
)
 
(6,778
)
Total property, plant and equipment
 
10,669

 
10,022

Long-term investments
 
319

 

Goodwill
 
272

 
272

Other property and equipment, net
 
1,514

 
1,523

Derivatives
 
8

 
64

Other assets, net
 
89

 
79

 
 
$
16,325

 
$
15,154








The financial information included as of September 30, 2016 has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.


5

Table of Contents


PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(in millions, except share data)
 
 
 
September 30,
2016
 
December 31,
2015
 
 
(Unaudited)
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
Accounts payable:
 
 
 
 
Trade
 
$
685

 
$
798

Due to affiliates
 
98

 
85

Interest payable
 
39

 
65

Income taxes payable
 

 
2

Current portion of long-term debt
 
485

 
448

Derivatives
 
7

 

Other
 
63

 
64

Total current liabilities
 
1,377

 
1,462

Long-term debt
 
2,726

 
3,207

Derivatives
 
20

 
1

Deferred income taxes
 
1,437

 
1,776

Other liabilities
 
334

 
333

Equity:
 
 
 
 
Common stock, $.01 par value; 500,000,000 shares authorized; 173,212,412 and 152,775,920 shares issued as of September 30, 2016 and December 31, 2015, respectively
 
2

 
2

Additional paid-in capital
 
8,867

 
6,267

Treasury stock at cost: 3,495,288 and 3,396,220 shares as of September 30, 2016 and December 31, 2015, respectively
 
(217
)
 
(199
)
Retained earnings
 
1,772

 
2,298

Total equity attributable to common stockholders
 
10,424

 
8,368

Noncontrolling interests in consolidated subsidiaries
 
7

 
7

Total equity
 
10,431

 
8,375

Commitments and contingencies
 


 


 
 
$
16,325

 
$
15,154








The financial information included as of September 30, 2016 has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(Unaudited) 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues and other income:
 
 
 
 
 
 
 
 
Oil and gas
 
$
643

 
$
557

 
$
1,665

 
$
1,670

Sales of purchased oil and gas
 
444

 
326

 
1,062

 
665

Interest and other
 
7

 
2

 
21

 
16

Derivative gains (losses), net
 
91

 
573

 
(95
)
 
617

Gain on disposition of assets, net
 
1

 
779

 
4

 
782

 
 
1,186

 
2,237

 
2,657

 
3,750

Costs and expenses:
 
 
 
 
 
 
 
 
Oil and gas production
 
141

 
189

 
438

 
532

Production and ad valorem taxes
 
32

 
36

 
97

 
112

Depletion, depreciation and amortization
 
386

 
364

 
1,123

 
1,003

Purchased oil and gas
 
458

 
339

 
1,113

 
684

Impairment of oil and gas properties
 

 
72

 
32

 
210

Exploration and abandonments
 
19

 
25

 
96

 
79

General and administrative
 
82

 
81

 
235

 
246

Accretion of discount on asset retirement obligations
 
5

 
3

 
14

 
9

Interest
 
50

 
46

 
161

 
138

Other
 
69

 
79

 
223

 
186

 
 
1,242

 
1,234

 
3,532

 
3,199

Income (loss) from continuing operations before income taxes
 
(56
)
 
1,003

 
(875
)
 
551

Income tax benefit (provision)
 
78

 
(355
)
 
362

 
(195
)
Income (loss) from continuing operations
 
22

 
648

 
(513
)
 
356

Loss from discontinued operations, net of tax
 

 
(2
)
 

 
(6
)
Net income (loss) attributable to common stockholders
 
$
22

 
$
646

 
$
(513
)
 
$
350

 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to common stockholders:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
0.13

 
$
4.29

 
$
(3.10
)
 
$
2.36

Loss from discontinued operations
 

 
(0.01
)
 

 
(0.04
)
Net income (loss)
 
$
0.13

 
$
4.28

 
$
(3.10
)
 
$
2.32

Diluted earnings per share attributable to common stockholders:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
0.13

 
$
4.28

 
$
(3.10
)
 
$
2.36

Loss from discontinued operations
 

 
(0.01
)
 

 
(0.04
)
Net income (loss)
 
$
0.13

 
$
4.27

 
$
(3.10
)
 
$
2.32

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
170

 
149

 
165

 
149

Diluted
 
170

 
150

 
165

 
149

 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$
0.04

 
$
0.04

 
$
0.08

 
$
0.08



The financial information included herein has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

7

Table of Contents

PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF EQUITY
(in millions, except share data and dividends per share)
(Unaudited)
 
 
 
 
 
Equity Attributable To Common Stockholders
 
 
 
 
 
 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Noncontrolling
Interests
 
Total Equity
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
 
149,380

 
$
2

 
$
6,267

 
$
(199
)
 
$
2,298

 
$
7

 
$
8,375

Issuance of common stock
 
19,838

 

 
2,534

 

 

 

 
2,534

Dividends declared ($0.08 per share)
 

 

 

 

 
(13
)
 

 
(13
)
Exercise of long-term incentive stock options and employee stock purchases
 
98

 

 
1

 
6

 

 

 
7

Purchases of treasury stock
 
(197
)
 

 

 
(24
)
 

 

 
(24
)
Tax provision related to stock-based compensation
 

 

 
(1
)
 

 

 

 
(1
)
Compensation costs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vested compensation awards, net
 
598

 

 

 

 

 

 

Compensation costs included in net loss
 

 

 
66

 

 

 

 
66

Net loss
 

 

 

 

 
(513
)
 

 
(513
)
Balance as of September 30, 2016
 
169,717

 
$
2

 
$
8,867

 
$
(217
)
 
$
1,772

 
$
7

 
$
10,431








The financial information included herein has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
(513
)
 
$
350

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depletion, depreciation and amortization
 
1,123

 
1,003

Impairment of oil and gas properties
 
32

 
210

Impairment of inventory and other property and equipment
 
6

 
21

Exploration expenses, including dry holes
 
41

 
22

Deferred income taxes
 
(340
)
 
146

Gain on disposition of assets, net
 
(4
)
 
(782
)
Accretion of discount on asset retirement obligations
 
14

 
9

Discontinued operations
 

 
(4
)
Interest expense
 
11

 
14

Derivative related activity
 
628

 
(22
)
Amortization of stock-based compensation
 
66

 
70

Other
 
51

 
13

Change in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(64
)
 
26

Income taxes receivable
 
17

 
23

Inventories
 
(7
)
 
(29
)
Prepaid expenses
 
(4
)
 
(3
)
Derivatives
 
(24
)
 

Other current assets
 
1

 
(6
)
Accounts payable
 
(8
)
 
(266
)
Interest payable
 
(26
)
 
(4
)
Income taxes payable
 
(2
)
 
26

Other current liabilities
 
(38
)
 
(28
)
Net cash provided by operating activities
 
960

 
789

Cash flows from investing activities:
 
 
 
 
Proceeds from disposition of assets, net of cash sold
 
503

 
556

Payments for acquisitions
 
(429
)
 

Proceeds from investment securities
 
255

 

Purchase of investment securities
 
(2,300
)
 

Additions to oil and gas properties
 
(1,387
)
 
(1,573
)
Additions to other assets and other property and equipment, net
 
(156
)
 
(191
)
Net cash used in investing activities
 
(3,514
)
 
(1,208
)
Cash flows from financing activities:
 
 
 
 
Principal payments on long-term debt
 
(455
)
 

Proceeds from issuance of common stock, net of issuance costs
 
2,534

 

Distributions to noncontrolling interests
 

 
(1
)
Exercise of long-term incentive plan stock options and employee stock purchases
 
7

 
6

Purchases of treasury stock
 
(24
)
 
(31
)
Tax (provision) benefits related to stock-based compensation
 
(1
)
 
10

Payments of financing fees
 

 
(3
)
Dividends paid
 
(7
)
 
(6
)
Net cash provided by (used in) financing activities
 
2,054

 
(25
)
Net decrease in cash and cash equivalents
 
(500
)
 
(444
)
Cash and cash equivalents, beginning of period
 
1,391

 
1,025

Cash and cash equivalents, end of period
 
$
891

 
$
581

  

The financial information included herein has been prepared by management
without audit by independent registered public accountants.
  
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)


NOTE A. Organization and Nature of Operations
Pioneer Natural Resources Company ("Pioneer" or the "Company") is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. The Company is a large independent oil and gas exploration and production company operating in the United States, with operations primarily in the Permian Basin in West Texas, the Eagle Ford Shale play in South Texas, the Raton field in southeast Colorado and the West Panhandle field in the Texas Panhandle.
NOTE B. Basis of Presentation
Presentation. In the opinion of management, the consolidated financial statements of the Company as of September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 include all adjustments and accruals, consisting only of normal, recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP") have been condensed in or omitted from this report pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). These consolidated financial statements should be read together with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
Certain reclassifications have been made to the 2015 financial statement and footnote amounts in order to conform to the 2016 presentation.
Restructuring. In February 2016, the Company announced plans to restructure its pressure pumping operations in South Texas, including relocating its two Eagle Ford Shale pressure pumping fleets to the Spraberry/Wolfcamp area. In connection therewith, the Company offered severance to certain employees and relocated a number of other employees from its South Texas locations to its operations in the Permian Basin. This initiative was substantially complete as of June 30, 2016.
In connection therewith, during the three and nine months ended September 30, 2016, the Company recognized nil and $4 million, respectively, of restructuring charges in other expense in the accompanying consolidated statements of operations. The restructuring charges for the nine months ended September 30, 2016 included approximately $3 million in cash employee severance costs and $1 million in employee relocation and other costs.
In May 2015, the Company announced plans to restructure its operations in Colorado, including closing its office in Denver, Colorado and eliminating its Trinidad-based pressure pumping operations. The restructuring plan was substantially complete as of December 31, 2015. In connection therewith, during the three and nine months ended September 30, 2015, the Company recognized $9 million and $24 million, respectively, of restructuring charges in other expense in the accompanying consolidated statements of operations.
As of September 30, 2016, the Company had $2 million of restructuring liabilities recorded in other current and noncurrent liabilities in the accompanying consolidated balance sheet, primarily related to future lease obligations associated with its Denver, Colorado office.
Issuance of common stock. During the first and second quarters of 2016, the Company issued 13.8 million and 6.0 million shares of common stock, respectively, and received cash proceeds of $1.6 billion and $937 million, respectively, net of associated underwriting and offering expenses.
New accounting pronouncements. In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses." ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowances for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company does not believe this standard will have a material impact on its consolidated financial statements.

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Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as certain classification changes in the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company does not believe this standard will have a material impact on its consolidated financial statements.
In February 2016, FASB issued ASU 2016-02, "Leases." ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases currently classified as operating leases and makes certain changes to the way lease expenses are accounted for. This update is effective for fiscal years beginning after December 15, 2018 and for interim periods beginning the following year. This update should be applied using a modified retrospective approach, and early adoption is permitted. The Company is evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 changes certain guidance related to the recognition, measurement, presentation and disclosure of financial instruments. This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is not permitted for the majority of the update, but is permitted for two of its provisions. The Company is evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") Topic 605, "Revenue Recognition," and most industry-specific guidance. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for one year to fiscal years beginning after December 15, 2017. Early adoption is permitted for fiscal years beginning after December 15, 2016. In May 2016, the FASB issued ASU 2016-11, which rescinds guidance from the SEC on accounting for gas balancing arrangements and will eliminate the use of the entitlements method. Entities have the option of using either a full retrospective or modified approach to adopt the new standards. The Company is evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements or decided upon its method of adoption.
NOTE C. Acquisitions and Divestitures
Permian Basin Acquisition. In August 2016, the Company acquired approximately 28,000 net acres in the Permian Basin, with net production of approximately 1,400 barrels of oil equivalent per day ("BOEPD"), from an unaffiliated third party for $429 million, including normal closing adjustments. The acquisition was accounted for using the acquisition method under ASC 805, "Business Combinations," which requires acquired assets and liabilities to be recorded at fair value as of the acquisition date.
The following table represents the preliminary allocation of the acquisition price to the assets acquired and the liabilities assumed based on their fair value at the acquisition date, pending final post-close adjustments:
Assets acquired:
 
 
Proved properties
 
$
79

Unproved properties
 
348

Other property and equipment
 
5

Liabilities assumed:
 
 
Asset retirement obligations
 
(3
)
Net assets acquired
 
$
429

The fair value measurements of the net assets acquired are based on inputs that are not observable in the market and, therefore, represent Level 3 inputs in the fair value hierarchy (see Note D for a description of the input levels in the fair value hierarchy). The Company calculated the fair values of the acquired proved properties and asset retirement obligations using a

11

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

discounted future cash flow model that utilizes management's estimates of (i) proved reserves, (ii) forecasted production rates, (iii) future operating, development and plugging and abandonment costs, (iv) future commodity prices and (v) a discount rate of 10 percent for proved properties and seven percent for asset retirement obligations. The Company calculated the fair values of the acquired unproved properties based on the average price per acre in comparable market transactions.
In connection with the acquisition, the Company incurred acquisition related costs (primarily consulting, advisory and legal fees) of approximately $1.0 million. The operating results included in the Company's accompanying consolidated statements of operations from the date of acquisition to September 30, 2016, and the operating results that would have been recognized had the acquisition occurred on January 1, 2016, are not material to the Company's accompanying consolidated statements of operations.
EFS Midstream Divestiture. In July 2015, the Company sold its 50.1 percent equity interest in EFS Midstream LLC ("EFS Midstream") to an unaffiliated third party, with the Company receiving total consideration of $1.0 billion, of which $530 million was received in cash and the remaining $501 million was in the form of a note, which was payable to the Company in July 2016. The Company recorded a net gain on the disposition of $777 million during the three and nine months ended September 30, 2015. In July 2016, the Company received the remaining cash payment of $501 million, which settled the outstanding note receivable.
NOTE D. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The three input levels of the fair value hierarchy are as follows:
Level 1 – quoted prices for identical assets or liabilities in active markets.
Level 2 – quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – unobservable inputs for the asset or liability.

12

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Assets and liabilities measured at fair value on a recurring basis. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
 
The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2016 for each of the fair value hierarchy levels: 
 
 
Fair Value Measurement at September 30, 2016 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at September 30, 2016
 
 
(in millions)
Assets:
 
 
 
 
 
 
 
 
Commodity derivatives
 
$

 
$
180

 
$

 
$
180

Deferred compensation plan assets
 
81

 

 

 
81

Total assets
 
81

 
180

 

 
261

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivatives
 

 
19

 

 
19

Interest rate derivatives
 

 
8

 

 
8

Total liabilities
 

 
27

 

 
27

Total recurring fair value measurements
 
$
81

 
$
153

 
$

 
$
234

Commodity derivatives. The Company's commodity derivatives represent oil, natural gas liquids ("NGL"), gas and diesel swap contracts, collar contracts and collar contracts with short puts. The asset and liability measurements for the Company's commodity derivative contracts represent Level 2 inputs in the hierarchy. The Company utilizes discounted cash flow and option-pricing models for valuing its commodity derivatives.
The asset and liability values attributable to the Company's commodity derivatives were determined based on inputs that include (i) the contracted notional volumes, (ii) independent active market price quotes, (iii) the applicable estimated credit-adjusted risk-free rate yield curve and (iv) the implied rate of volatility inherent in the collar contracts and collar contracts with short puts, which is based on active and independent market-quoted volatility factors.
Deferred compensation plan assets. The Company's deferred compensation plan assets represent investments in equity and mutual fund securities that are actively traded on major exchanges. These investments are measured based on observable prices on major exchanges. As of September 30, 2016, the significant inputs to these asset values represented Level 1 independent active exchange market price inputs.
Interest rate derivatives. The Company's interest rate derivative liabilities represent interest rate swap contracts. The Company utilizes discounted cash flow models for valuing its interest rate derivatives. The derivative values attributable to the Company's interest rate derivative contracts are based on (i) the contracted notional amounts, (ii) forward active market-quoted London Interbank Offered Rates ("LIBOR") and (iii) the applicable credit-adjusted risk-free rate yield curve. The Company's interest rate derivative fair value measurements represent Level 2 inputs in the hierarchy.
Assets and liabilities measured at fair value on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances. These assets and liabilities can include inventory, proved and unproved oil and gas properties and other long-lived assets that are written down to fair value when they are impaired or held for sale. See Note C for information on the fair value of assets and liabilities acquired in the Permian Basin acquisition.The Company recognized noncash impairment charges of $6 million and $21 million for the nine months ended September 30, 2016 and 2015, respectively, attributable to inventory and other property and equipment.

13

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Proved oil and gas properties. As a result of the Company's proved property impairment assessments, the Company recognized noncash impairment charges to reduce the carrying values of (i) the West Panhandle field during the three months ended March 31, 2016 and (ii) the Eagle Ford Shale field, the West Panhandle field and the South Texas - Other field during the year ended December 31, 2015 to their estimated fair values.
The Company calculated the fair values of the West Panhandle field, the Eagle Ford Shale field and the South Texas - Other field using a discounted future cash flow model. Significant Level 3 assumptions associated with the calculations included management's longer-term commodity price outlooks ("Management's Price Outlooks") and management's outlooks for (i) production costs, (ii) capital expenditures, (iii) production and (iv) estimated proved reserves and risk-adjusted probable reserves. Management's Price Outlooks are developed based on third-party longer-term commodity futures price outlooks as of each measurement date. The expected future net cash flows were discounted using an annual rate of 10 percent to determine estimated fair value.
The following table presents the fair value and fair value adjustments (in millions) for the Company's 2016 and 2015 proved property impairments, as well as the average oil price per barrel ("Bbl") and gas price per British thermal unit ("MMBtu") utilized in respective Management's Price Outlooks:
 
 
 
 
 
 
 
 
Management's Price Outlooks
 
 
Impairment Date
 
Fair Value
 
Fair Value Adjustment
 
Oil
 
Gas
West Panhandle
 
March 2016
 
$
33

 
$
(32
)
 
$
49.77

 
$
3.24

South Texas - Eagle Ford Shale
 
December 2015
 
$
483

 
$
(846
)
 
$
52.82

 
$
3.34

South Texas - Other
 
September 2015
 
$
88

 
$
(72
)
 
$
57.41

 
$
3.46

West Panhandle
 
March 2015
 
$
61

 
$
(138
)
 
$
65.02

 
$
3.83

It is reasonably possible that the estimate of undiscounted future net cash flows attributable to these or other properties may change in the future resulting in the need to impair their carrying values. The primary factors that may affect estimates of future cash flows are (i) future adjustments, both positive and negative, to proved and risk-adjusted probable and possible oil and gas reserves, (ii) results of future drilling activities, (iii) Management's Price Outlooks and (iv) increases or decreases in production and capital costs associated with these reserves.
Unproved oil and gas properties. During March 2016, the Company recorded an impairment charge of $32 million to write-off the carrying value of its unproved royalty acreage in Alaska (reported in exploration and abandonments in the accompanying consolidated statements of operations) as a result of the operator curtailing operations in the area and Management's Price Outlooks.
Financial instruments not carried at fair value. Carrying values and fair values of financial instruments that are not carried at fair value in the accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015 are as follows: 

 
 
September 30, 2016
 
December 31, 2015
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
(in millions)
Commercial paper, corporate bonds and time deposits
 
$
2,052

 
$
2,052

 
$
275

 
$
275

Current portion of long-term debt
 
$
485

 
$
496

 
$
448

 
$
462

Long-term debt
 
$
2,726

 
$
3,022

 
$
3,207

 
$
3,206

Commercial paper, corporate bonds and time deposits. Periodically, the Company invests in commercial paper and corporate bonds with investment grade rated entities. The Company also periodically enters into time deposits with financial institutions. The investments are carried at amortized cost, which approximates fair value, and classified as held-to-maturity as the Company has the intent and ability to hold them until they mature. The net carrying value of held-to-maturity investments is adjusted for amortization of premiums and accretion of discounts to maturity over the life of the investments. Income related to these investments is recorded in interest and other income in the Company's consolidated statement of operations. The investments represent Level

14

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

2 inputs in the hierarchy. Commercial paper, corporate bonds and time deposits are included in cash and cash equivalents if they have maturity dates that are less than 90 days at the date of purchase; otherwise, they are reflected in short-term investments or long-term investments in the accompanying consolidated balance sheets based on their maturity dates. The following table provides the components of the Company's cash and cash equivalents and investments as of September 30, 2016:
 
 
September 30, 2016
Consolidated Balance Sheet Location
 
Cash
 
Commercial Paper
 
Corporate Bonds
 
Time
Deposits
 
Total
 
 
(in millions)
Cash and cash equivalents
 
$
891

 
$

 
$

 
$

 
$
891

Short-term investments
 

 
742

 
459

 
532

 
1,733

Long-term investments
 

 

 
319

 

 
319

 
 
$
891

 
$
742

 
$
778

 
$
532

 
$
2,943

Debt obligations. Current and noncurrent long-term debt includes the Company's credit facility and the Company's senior notes. The fair value of the Company's debt obligations is determined utilizing inputs that are Level 2 measurements in the fair value hierarchy. The fair value of the Company's credit facility is calculated using a discounted cash flow model based on (i) forecasted contractual interest and fee payments, (ii) forward active market-quoted United States Treasury Bill rates and (iii) the applicable credit-adjustments. The Company's senior notes represent debt securities that are not actively traded on major exchanges. The fair values of the Company's senior notes are based on their periodic values as quoted on the major exchanges.
The Company has other financial instruments consisting primarily of receivables, prepaid expenses, payables and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities. Non-financial assets and liabilities initially measured at fair value include assets acquired and liabilities assumed in a business combination, goodwill and asset retirement obligations.
NOTE E. Derivative Financial Instruments
The Company utilizes commodity swap contracts, collar contracts and collar contracts with short puts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company's indebtedness.
Periodically, the Company may pay a premium to enter into commodity contracts. Premiums paid, if any, have been nominal in relation to the value of the underlying asset in the contract. The Company recognizes the nominal premium payments as an increase to the value of derivative assets when paid. All derivatives are adjusted to fair value as of each balance sheet date.
Oil production derivative activities. All material physical sales contracts governing the Company's oil production are tied directly to, or are highly correlated with, New York Mercantile Exchange ("NYMEX") West Texas Intermediate ("WTI") oil prices. The Company uses derivative contracts to manage oil price volatility and basis swap contracts to reduce basis risk between NYMEX prices and the actual index prices at which the oil is sold.

15

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table sets forth the volumes per day associated with the Company's outstanding oil derivative contracts as of September 30, 2016 and the weighted average oil prices for those contracts: 
 
2016
 
 
Year Ending December 31,
 
Fourth Quarter
 
 
2017
Collar contracts:
 
 
 
 
Volume (Bbl)

 
 
6,000

Price per Bbl:
 
 
 
 
Ceiling
$

 
 
$
70.40

Floor
$

 
 
$
50.00

Collar contracts with short puts:
 
 
 
 
Volume (Bbl) (a)
112,000

 
 
94,973

Price per Bbl:
 
 
 
 
Ceiling
$
75.94

 
 
$
62.36

Floor
$
65.41

 
 
$
49.07

Short put
$
47.03

 
 
$
41.30

Basis swap contracts:
 
 
 
 
Midland-Cushing index swap volume (Bbl)
6,630

 
 

Price differential ($/Bbl) (b)
$
(0.80
)
 
 
$

____________________
(a)
During the nine months ended September 30, 2016, the Company paid $24 million to convert 33,000 Bbls per day of 2017 collar contracts with short puts into new 2017 collar contracts with short puts with a ceiling price of $60.76 per Bbl, a floor price of $45.00 per Bbl and a short put price of $40.00 per Bbl. During the period from October 1, 2016 through October 28, 2016, the Company entered into additional oil collar contracts with short puts for (i) 20,000 Bbls per day of January through June 2017 production with a ceiling price of $58.99 per Bbl, a floor price of $48.50 per Bbl and a short put price of $39.00 per Bbl, (ii) 32,000 Bbls per day of July through December 2017 production with a ceiling price of $60.77 per Bbl, a floor price of $50.00 per Bbl and a short put price of $40.00 per Bbl and (iii) 20,000 Bbls per day of 2018 production with a ceiling price of $65.14 per Bbl, a floor price of $50.00 per Bbl and a short put price of $40.00 per Bbl.
(b)
Represents the basis differential between Midland, Texas oil prices and WTI prices at Cushing, Oklahoma.
NGL production derivative activities. All material physical sales contracts governing the Company's NGL production are tied directly or indirectly to either Mont Belvieu, Texas or Conway, Kansas NGL component product prices. The Company uses derivative contracts to manage the NGL component price volatility.

16

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table sets forth the volumes per day associated with the Company's outstanding NGL derivative contracts as of September 30, 2016 and the weighted average NGL prices for those contracts: 
 
2016
 
Year Ending December 31,
 
Fourth Quarter
 
2017
Propane swap contracts (a):
 
 
 
Volume (Bbl)
6,000

 

Price per Bbl
$
21.51

 
$

Ethane collar contracts (b):
 
 
 
Volume (Bbl)

 
3,000

Price per Bbl:
 
 
 
Ceiling
$

 
$
11.83

Floor
$

 
$
8.68

Ethane basis swap contracts (c):
 
 
 
Volume (MMBtu)
2,768

 

Price differential ($/MMBtu)
$
0.91

 
$

 ____________________
(a)
Represent derivative contracts that reduce the price volatility of propane forecasted for sale by the Company at Mont Belvieu, Texas and Conway, Kansas posted prices.
(b)
Represent collar contracts that reduce the price volatility of ethane forecasted for sale by the Company at Mont Belvieu, Texas-posted prices.
(c)
Represent basis swap contracts that reduce the price volatility of ethane forecasted for sale by the Company at Mont Belvieu, Texas-posted prices. The basis swaps fix the basis differential on a NYMEX Henry Hub ("HH") MMBtu equivalent basis. The Company will receive the HH price plus the price differential on 2,768 MMBtu per day, which is equivalent to 1,000 Bbls per day of ethane.
Gas production derivative activities. All material physical sales contracts governing the Company's gas production are tied directly or indirectly to HH gas prices or regional index prices where the gas is sold. The Company uses derivative contracts to manage gas price volatility and basis swap contracts to reduce basis risk between HH prices and the actual index prices at which the gas is sold.

17

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table sets forth the volumes per day associated with the Company's outstanding gas derivative contracts as of September 30, 2016 and the weighted average gas prices for those contracts: 
 
2016
 
Year Ending December 31,
 
Fourth Quarter
 
2017
 
2018
Swap contracts:
 
 
 
 
 
Volume (MMBtu)
70,000

 

 

Price per MMBtu
$
4.06

 
$

 
$

Collar contracts with short puts:
 
 
 
 
 
Volume (MMBtu) (a)
180,000

 
130,000

 
50,000

Price per MMBtu:
 
 
 
 
 
Ceiling
$
4.01

 
$
3.39

 
$
3.40

Floor
$
3.24

 
$
2.85

 
$
2.75

Short put
$
2.78

 
$
2.41

 
$
2.25

Basis swap contracts:
 
 
 
 
 
Gulf Coast index swap volume (b)
10,000

 

 

Price differential ($/MMBtu)
$

 
$

 
$

Mid-Continent index swap volume (b)
15,000

 
45,000

 

Price differential ($/MMBtu)
$
(0.32
)
 
$
(0.32
)
 
$

Permian Basin index swap volume (c)
34,946

 
9,863

 

Price differential ($/MMBtu)
$
0.41

 
$
0.37

 
$

____________________
(a)
During the period from October 1, 2016 through October 28, 2016, the Company entered into additional gas collar contracts with short puts for 50,000 MMBtu per day of 2017 production with a ceiling price of $3.76 per MMBtu, a floor price of $3.06 per MMBtu and a short put price of $2.50 per MMBtu.
(b)
Represent swaps that fix the basis differentials between the index prices at which the Company sells its Gulf Coast and Mid-Continent gas, respectively, and the HH index price used in gas swap and collar contracts with short puts.
(c)
Represent swaps that fix the basis differentials between Permian Basin index prices and southern California index prices for Permian Basin gas forecasted for sale in southern California.
Marketing and basis derivative activities. Periodically, the Company enters into buy and sell marketing arrangements to fulfill firm pipeline transportation commitments. Associated with these marketing arrangements, the Company may enter into index swaps to mitigate price risk. As of September 30, 2016, the Company did not have any marketing derivatives outstanding.
Diesel derivative activities. Periodically, the Company enters into diesel derivative swap contracts to mitigate fuel price risk. The diesel derivative swap contracts are priced at an index that is highly correlated to the prices that the Company incurs to fuel its drilling rigs and fracture stimulation fleet equipment. As of September 30, 2016, the Company was party to derivative swap contracts for 1,000 Bbls per day of diesel for 2017 at an average per Bbl fixed price of $60.48.
Interest rate derivative activities. As of September 30, 2016, the Company was a party to interest rate derivative contracts whereby the Company will receive the three-month LIBOR rate for the 10-year period from December 2017 to December 2027 in exchange for paying a weighted average fixed interest rate of 1.94 percent on a notional amount of $250 million on December 15, 2017.
Tabular disclosure of derivative financial instruments. All of the Company's derivatives are accounted for as non-hedge derivatives and therefore all changes in the fair values of its derivative contracts are recognized as gains or losses in the earnings of the periods in which they occur. The Company classifies the fair value amounts of derivative assets and liabilities as net current or noncurrent derivative assets or net current or noncurrent derivative liabilities, whichever the case may be, by commodity and counterparty. The Company enters into derivatives under master netting arrangements, which, in an event of default, allows the Company to offset payables to and receivables from the defaulting counterparty.

18

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The aggregate fair value of the Company's derivative instruments reported in the accompanying consolidated balance sheets by type and counterparty, including the classification between current and noncurrent assets and liabilities, consists of the following:
 
Fair Value of Derivative Instruments as of September 30, 2016
Type
 
Consolidated
Balance Sheet
Location
 
Fair
Value
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Fair Value Presented in the Consolidated Balance Sheet
 
 
 
 
(in millions)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Asset Derivatives:
 
 
 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
190

 
$
(18
)
 
$
172

Commodity price derivatives
 
Derivatives - noncurrent
 
$
11

 
$
(3
)
 
8

 
 
 
 
 
 
 
 
$
180

Liability Derivatives:
 

 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
25

 
$
(18
)
 
$
7

Commodity price derivatives
 
Derivatives - noncurrent
 
$
15

 
$
(3
)
 
12

Interest rate derivatives
 
Derivatives - noncurrent
 
$
8

 
$

 
8

 
 
 
 
 
 
 
 
$
27


Fair Value of Derivative Instruments as of December 31, 2015
Type
 
Consolidated
Balance Sheet
Location
 
Fair
Value
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Fair Value Presented in the Consolidated Balance Sheet
 
 
 
 
(in millions)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Asset Derivatives:
 
 
 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
695

 
$
(1
)
 
$
694

Commodity price derivatives
 
Derivatives - noncurrent
 
$
64

 
$

 
64

 
 
 
 
 
 
 
 
$
758

Liability Derivatives:
 
 
 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
1

 
$
(1
)
 
$

Commodity price derivatives
 
Derivatives - noncurrent
 
$
1

 
$

 
1

 
 
 
 
 
 
 
 
$
1


The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company's credit risk policies and procedures.


19

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table details the location of gains and losses recognized on the Company's derivative contracts in the accompanying consolidated statements of operations:
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as
 
Location of Gain / (Loss) Recognized in
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 Hedging Instruments
 
Earnings on Derivatives
 
2016
 
2015
 
2016
 
2015
 
 
 
 
(in millions)
Commodity price derivatives
 
Derivative gains (losses), net
 
$
91

 
$
575

 
$
(87
)
 
$
614

Interest rate derivatives
 
Derivative gains (losses), net
 

 
(2
)
 
(8
)
 
3

Total
 
$
91

 
$
573

 
$
(95
)
 
$
617

NOTE F. Exploratory Costs
The Company capitalizes exploratory well and project costs until a determination is made that the well or project has either found proved reserves, is impaired or is sold. The Company's capitalized exploratory well and project costs are presented in proved properties in the accompanying consolidated balance sheets. If the exploratory well or project is determined to be impaired, the impaired costs are charged to exploration and abandonments expense.
The following table reflects the Company's capitalized exploratory well and project activity during the three and nine months ended September 30, 2016:
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
 
(in millions)
Beginning capitalized exploratory costs
$
357

 
$
306

Additions to exploratory costs pending the determination of proved reserves
328

 
991

Reclassification due to determination of proved reserves
(286
)
 
(898
)
Exploratory well costs charged to exploration expense
(1
)
 
(1
)
Ending capitalized exploratory costs
$
398

 
$
398

The following table provides an aging, as of September 30, 2016 and December 31, 2015 of capitalized exploratory costs and the number of projects for which exploratory well costs have been capitalized for a period greater than one year, based on the date drilling was completed:
 
September 30, 2016
 
December 31, 2015
 
(in millions, except well counts)
Capitalized exploratory well costs that have been suspended:
 
 
 
One year or less
$
396

 
$
303

More than one year
2

 
3

 
$
398

 
$
306

Number of wells or projects with exploratory well costs that have been suspended for a period greater than one year
1

 
1

The well that was suspended for a period greater than one year as of September 30, 2016 is in the Eagle Ford Shale area. The Company expects to complete this well in 2017.
NOTE G. Long-term Debt
Credit facility. The Company's long-term debt consists of senior notes, a revolving corporate credit facility (the "Credit Facility") and the effects of issuance costs, issuance discounts and net deferred fair value hedge losses. The Credit Facility is maintained with a syndicate of financial institutions and has aggregate loan commitments of $1.5 billion that expire in August 2020. As of September 30, 2016, the Company had no outstanding borrowings under the Credit Facility and was in compliance with its debt covenants.

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Senior notes. The Company's 5.875% senior notes (the "5.875% Senior Notes") matured and were repaid in July 2016. The Company funded the $455 million repayment of the 5.875% Senior Notes with cash on hand. The Company's 6.65% senior notes, with an outstanding debt principal balance of $485 million, will mature in March 2017 and are classified as current in the accompanying consolidated balance sheets as of September 30, 2016.
NOTE H. Incentive Plans
Stock-based compensation
For the three and nine months ended September 30, 2016, the Company recorded $31 million and $84 million, respectively, of stock-based compensation expense for all plans, as compared to $26 million and $87 million for the same respective periods in 2015. As of September 30, 2016, there was $138 million of unrecognized compensation expense related to unvested share-based compensation plan awards, including $36 million attributable to stock-based awards that are expected to be settled on their vesting date in cash, rather than in equity shares ("Liability Awards"). The unrecognized compensation expense will be recognized over the remaining vesting periods of the awards, which is a period of less than three years on a weighted average basis. As of September 30, 2016 and December 31, 2015, accounts payable – due to affiliates included $17 million and $16 million, respectively, of liabilities attributable to Liability Awards.
The following table summarizes the activity that occurred during the nine months ended September 30, 2016 for each type of share-based incentive award issued by Pioneer: 
 
 
Restricted
Stock Equity
Awards
 
Restricted
Stock Liability
Awards
 
Performance
Units
 
Stock
Options
Outstanding as of December 31, 2015
 
1,081,650

 
271,031

 
148,547

 
199,058

Awards granted
 
520,980

 
180,383

 
104,114

 

Awards vested
 
(459,833
)
 
(141,441
)
 
(8,670
)
 

Awards forfeited
 
(43,996
)
 
(14,067
)
 
(4,821
)
 

Outstanding as of September 30, 2016
 
1,098,801

 
295,906

 
239,170

 
199,058

NOTE I. Asset Retirement Obligations
The Company's asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities. The following table summarizes the Company's asset retirement obligation activity during the three and nine months ended September 30, 2016 and 2015: 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Beginning asset retirement obligations
 
$
281

 
$
187

 
$
285

 
$
189

Liabilities assumed in acquisitions
 
3

 

 
3

 

New wells placed on production
 

 
1

 

 
2

Liabilities settled
 
(8
)
 
(9
)
 
(21
)
 
(18
)
Accretion of discount
 
5

 
3

 
14

 
9

Ending asset retirement obligations
 
$
281

 
$
182

 
$
281

 
$
182

The Company records the current and noncurrent portions of asset retirement obligations in other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets. As of both September 30, 2016 and December 31, 2015, the current portion of the Company's asset retirement obligations was $40 million.

21

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)



NOTE J. Commitments and Contingencies
The Company is a party to proceedings and claims incidental to its business. While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to such proceedings and claims will not have a material adverse effect on the Company's financial position as a whole or on its liquidity, capital resources or future annual results of operations. The Company records reserves for contingencies when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.
Obligations following divestitures. In connection with its divestiture transactions, the Company may retain certain liabilities and provide the purchaser certain indemnifications, subject to defined limitations, which may apply to identified pre-closing matters, including matters of litigation, environmental contingencies, royalty obligations and income taxes. The Company does not believe these obligations are probable of having a material impact on its liquidity, financial position or future results of operations.
NOTE K. Interest and Other Income
The following table provides the components of the Company's interest and other income for the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Interest income
 
$
5

 
$
2

 
$
14

 
$
2

Deferred compensation plan income
 

 

 
2

 
4

Equity interest in income of EFS Midstream (a)
 

 

 

 
5

Other income
 
2

 

 
5

 
5

Total interest and other income
 
$
7

 
$
2

 
$
21

 
$
16

 ____________________
(a)
The Company accounted for its investment in EFS Midstream prior to its sale in July 2015 using the equity method. EFS Midstream provided gathering, treating and transportation services for the Company. See Note C for additional information on the Company's sale of EFS Midstream.

22

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)



 NOTE L. Other Expense
The following table provides the components of the Company's other expense for the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Transportation commitment charges (a)
 
$
27

 
$
11

 
$
77

 
$
38

Loss from vertical integration services (b)
 
17

 
20

 
46

 
16

Idle drilling and well service equipment charges (c)
 
10

 
22

 
42

 
73

Terminated drilling rig charges (d)
 

 

 
15

 

Impairment of inventory and other property and equipment (e)
 
1

 
13

 
6

 
21

Restructuring charges (f)
 

 
9

 
4

 
24

Other
 
14

 
4

 
33

 
14

Total other expense
 
$
69

 
$
79

 
$
223

 
$
186

 ____________________
(a)
Primarily represents firm transportation payments on excess pipeline capacity commitments.
(b)
Loss from vertical integration services primarily represents net margins (attributable to third party working interest owners) that result from Company-provided fracture stimulation and service operations, which are ancillary to and supportive of the Company's oil and gas joint operating activities, and do not represent intercompany transactions. For the three and nine months ended September 30, 2016, these vertical integration net margins included $19 million and $144 million, respectively, of revenues and $36 million and $190 million, respectively, of costs and expenses. For the same respective periods in 2015, these vertical integration net margins included $66 million and $264 million of revenues and $86 million and $280 million of costs and expenses.
(c)
Primarily represents expenses attributable to idle drilling rig fees that are not chargeable to joint operations.
(d)
Primarily represents charges to terminate rig contracts that were not required to meet planned drilling activities.
(e)
Primarily represents charges to reduce excess material and supplies inventories to their market values. See Note D for additional information on the fair value of materials and supplies inventory.
(f)
Represents costs associated with the Company's restructuring of its pressure pumping operations in South Texas in 2016 and its operations in Colorado in 2015. See Note B for additional information on the restructuring charges.
NOTE M. Income Taxes
The Company's income tax benefit attributable to income from continuing operations consisted of the following for the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Current tax benefit (provision)
 
$
22

 
$
(48
)
 
$
22

 
$
(49
)
Deferred tax benefit (provision)
 
56

 
(307
)
 
340

 
(146
)
Income tax benefit (provision)
 
$
78

 
$
(355
)
 
$
362

 
$
(195
)
For the three and nine months ended September 30, 2016, the Company's effective tax rates, excluding income attributable to noncontrolling interests, were 140 percent and 41 percent, respectively, as compared to an effective rate of 35 percent for each of the the same respective periods in 2015. The Company's effective tax rates for the three and nine months ended September 30, 2016 differ from the U.S. statutory rate of 35 percent primarily due to recognizing research and experimental expenditures credits of $59 million in the third quarter of 2016, and, to a lesser extent, state income tax apportionments and nondeductible expenses.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based upon the technical merits of the position. As of September 30, 2016, the Company had unrecognized tax benefits of $94 million resulting from research and experimental expenditures related to horizontal drilling and completions innovations. If all of, or a portion of, the unrecognized tax benefit is sustained upon

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

examination by the taxing authorities, the tax benefit will be recognized as a reduction to the Company's deferred tax liability and will affect the Company's effective tax rate in the period it is recognized. The Company expects to resolve the uncertainties associated with the unrecognized tax benefit by September 2017. There were no unrecognized tax benefits as of December 31, 2015.
The Company files income tax returns in the U.S. federal and various state and foreign jurisdictions. The Internal Revenue Service has closed examinations of the 2013 and prior tax years and, with few exceptions, the Company believes that it is no longer subject to examinations by state and foreign tax authorities for years before 2010. As of September 30, 2016, no adjustments had been proposed in any jurisdiction that would have a significant effect on the Company's liquidity, future results of operations or financial position.
NOTE N. Net Income (Loss) Per Share
The following table reconciles the Company's income (loss) from continuing operations to basic and diluted net income (loss) attributable to common stockholders for the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Income (loss) from continuing operations
 
$
22

 
$
648

 
$
(513
)
 
$
356

Participating basic earnings
 

 
(6
)
 

 
(3
)
Basic and diluted income (loss) from continuing operations
 
$
22

 
$
642

 
(513
)
 
353

Basic and diluted loss from discontinued operations
 
$

 
$
(2
)
 
$

 
$
(6
)
Basic and diluted net income (loss) attributable to common stockholders
 
$
22

 
$
640

 
$
(513
)
 
$
347

Basic and diluted weighted average common shares outstanding were 170 million and 165 million, respectively, for the three and nine months ended September 30, 2016. Basic weighted average common shares outstanding were 149 million for both the three and nine months ended September 30, 2015, and diluted weighted average shares outstanding were 150 million and 149 million for the three and nine months ended September 30, 2015, respectively.

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PIONEER NATURAL RESOURCES COMPANY

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial and Operating Performance
The Company's financial and operating performance for the third quarter of 2016 included the following highlights:
Net income attributable to common stockholders for the third quarter of 2016 was $22 million ($0.13 per diluted share), as compared to net income of $646 million ($4.27 per diluted share) for the third quarter of 2015. The primary components of the decrease in net income attributable to common stockholders include:
a $778 million decrease in net gains on disposition of assets as a result of recognizing a $777 million gain in the third quarter of 2015 associated with the sale of EFS Midstream LLC;
a $482 million decrease in net derivative gains, primarily as a result of changes in forward commodity prices and the Company's portfolio of derivatives;
a $22 million increase in DD&A expense, primarily attributable to a 13 percent increase in sales volumes; partially offset by
a $433 million reduction in the Company's income taxes as a result of the reduction in earnings from continuing operations;
a $86 million increase in oil and gas revenues as a result of the aforementioned 13 percent increase in sales volumes, partially offset by a decrease in oil and gas prices;
a $72 million decrease in impairment charges as a result of the South Texas - Other impairment charge in September 2015;
a $48 million decrease in total oil and gas production costs, primarily due to the Company's cost saving initiatives; and
a $10 million decrease in other expense, primarily related to decreases in idle drilling and well service equipment charges, inventory impairment charges and restructuring charges.
During the third quarter of 2016, average daily sales volumes from continuing operations increased by 13 percent to 238,878 BOEPD, as compared to 210,711 BOEPD during the third quarter of 2015. The increase in third quarter 2016 average daily sales volumes, as compared to the third quarter of 2015, is primarily due to the Company's successful Spraberry/Wolfcamp horizontal drilling program.
Average oil and gas prices decreased during the third quarter of 2016 to $41.44 per Bbl and $2.43 per Mcf, respectively, as compared to $42.46 per Bbl and $2.53 per Mcf, respectively, in the third quarter of 2015. Average NGL prices increased during the third quarter of 2016 to $12.46 per Bbl, as compared to $12.39 per Bbl in the third quarter of 2015.
Net cash provided by operating activities increased to $441 million for the three months ended September 30, 2016, as compared to $358 million for the three months ended September 30, 2015. The $83 million increase in net cash provided by operating activities is primarily due to increases in the Company's oil and gas revenues for the three months ended September 30, 2016 as a result of increased sales volumes (partially offset by the aforementioned decreases in oil and gas prices) and reductions in operating costs; partially offset by an increase in funds used to satisfy working capital obligations.
As of September 30, 2016, the Company's net debt to book capitalization decreased to three percent, as compared to 21 percent at December 31, 2015, primarily due to the Company's issuances of 19.8 million shares of common stock during 2016 for cash proceeds of $2.5 billion.

 Fourth Quarter 2016 Outlook
Based on current estimates, the Company expects the following operating and financial results from continuing operations for the quarter ending December 31, 2016:
Production is forecasted to average 237,000 to 242,000 BOEPD.
Production costs (including production and ad valorem taxes and transportation costs) are expected to average $7.75 to $9.75 per BOE based on current NYMEX strip commodity prices. DD&A expense is expected to average $17.50 to $19.50 per BOE.
Total exploration and abandonment expense is expected to be $20 million to $30 million. General and administrative expense is expected to be $78 million to $83 million. Interest expense is expected to be $45 million to $50 million, and other expense is

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PIONEER NATURAL RESOURCES COMPANY

expected to be $65 million to $75 million. Other expense is expected to include (i) $5 million to $10 million for stacked drilling rig charges, (ii) $28 million to $33 million of charges associated with excess firm gathering and transportation commitments, (iii) $15 million to $20 million of losses (principally noncash) associated with the portion of vertical integration services provided to nonaffiliated working interest owners, including joint venture partners, in wells operated by the Company and (iv) other miscellaneous charges. Accretion of discount on asset retirement obligations is expected to be $4 million to $7 million.
The Company's effective income tax rate is expected to range from 35 percent to 40 percent assuming current capital spending plans and no significant mark-to-market changes in the Company's derivative position. Current income taxes are expected to be less than $5 million.
Operations and Drilling Highlights
The following table summarizes the Company's average daily oil, NGL, gas and total production by asset area during the nine months ended September 30, 2016:
 
 
Oil (Bbls)
 
NGLs (Bbls)
 
Gas (Mcf)
 
Total (BOE)
Permian Basin
 
113,383

 
29,108

 
136,072

 
165,169

South Texas - Eagle Ford Shale
 
13,085

 
10,740

 
76,903

 
36,643

Raton Basin
 

 

 
97,875

 
16,312

West Panhandle
 
2,807

 
3,195

 
11,293

 
7,885

South Texas - Other
 
1,323

 
208

 
21,650

 
5,139

Other
 
4

 
1

 
35

 
10

   Total
 
130,602

 
43,252

 
343,828

 
231,158

The Company's total liquids production from continuing operations increased to 75 percent of total production, on a BOE basis, for the nine months ended September 30, 2016, as compared to 70 percent for the same period last year.
During the second quarter of 2016, the Company increased its capital expenditures budget for the year by $100 million to $2.1 billion to fund expected incremental drilling rig expenditures during 2016 (increasing the rig count to 17 rigs from the 12 rigs that were originally planned). The capital expenditures budget excludes acquisitions, asset retirement obligations, capitalized interest and geological and geophysical administrative costs. The updated 2016 capital budget includes $1.95 billion for drilling and completions operations (includes tank batteries, salt water disposal facilities and gas processing facilities) and $150 million for water infrastructure, vertical integration, systems upgrades and field facilities. The additional drilling activity in 2016 is pad drilling, with the wells on the new pads expected to be placed on production in early 2017.
 The following table summarizes by geographic area the Company's finding and development costs incurred during the nine months ended September 30, 2016: 
 
 
Acquisition Costs
 
Exploration
 
Development
 
 
 
 
Proved
 
Unproved
 
Costs
 
Costs
 
Total
 
 
(in millions)
Permian Basin
 
$
82

 
$
360

 
$
1,003

 
$
349

 
$
1,795

South Texas - Eagle Ford Shale
 

 

 
35

 
24

 
59

West Panhandle
 

 

 
1

 
5

 
6

South Texas - Other
 

 

 

 
2

 
2

Other
 

 

 
4

 

 
4

   Total
 
$
82

 
$
360

 
$
1,043

 
$
380

 
$
1,866


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PIONEER NATURAL RESOURCES COMPANY

The following table summarizes the Company's development and exploration/extension drilling activities for the nine months ended September 30, 2016: 
 
 
Development Drilling
 
 
Beginning Wells
in Progress
 
Wells
Spud
 
Successful
Wells
 
Ending Wells
in Progress
Permian Basin
 
27

 
18

 
33

 
12

South Texas - Eagle Ford Shale